It was a fitting way for the greenback to end the week. The Dow Jones FXCM Dollar Index (ticker = USDollar) posted its biggest daily drop in three weeks, leaving the benchmark hanging precariously above 9,900. A look at its individual performances tells us that the reserve was inherently weak on both the daily and weekly time frame. This is a bearing that we should have expected from the fundamental developments this past week. A new stimulus bump from the Fed, relieved tension in the Eurozone and a broad advance in risk-based speculative trends are all bearish for the safe haven. Yet, after such an impressive run, the threshold for further progress has been lifted.

Under normal trading conditions, we could see the market carry through on optimism over growth, rates of return, further easing of global financial tension or any number of other big-ticket items that investors have fretted over. Riding on momentum and a forward-looking fundamental interest, a level like the EURUSD’s 1.3200-resistance or USDollar’s 9,900-support could clear on a risk jump alone. However, we don’t have the proper conditions for that level of volatility or trend development. The coming week is the last full week of uninterrupted trading this year. That does not make for a good opportunity to maintain and further develop a stretched trend like that seen in risk appetite. With speculative participation already historically low, we will see the draining of volume have a more pronounced effect on trading conditions. Traders will want to take profit and balance their books for the year end. There will also be a distinct effort to avoid the activity shock expected on Friday with the QuadrupleWitching (the simultaneous expiration of index futures, options on futures, stock futures and stock options).

As potent as the activity wind down will be on market conditions, we can see hold outs for activity and prevailing trends. The best means for sustaining progress is to find a catalyst to offer another push. There are a number of US indicators on deck (TIC flows, housing starts and spending figures to name a few), but these indicators don’t have the necessary sway to curb the outflow. We need something more along the line of a resolution to the Fiscal Cliff. Both sides have sparred and verbally held their ground between spending and taxes, but their actions show greater accommodation from both parties. The probability of a deal is high, but the market has worked to price in that outcome. We’ll see how much the market expects as each day is a countdown to the drain of liquidity for the year and tolerance for holding risk will drop fast.

Euro Enjoys a Market-Wide Advance, Bu it May be Out of Relief Rallies

Though the kiwi may have leveraged more of its advance, the Euro was technically the strongest currency this past week. With Greece securing funding to keep financial tumult at bay and an EU banking supervisor loosely in place, the market finds itself in a very familiar position: officials have once again bought a short period of respite from the underlying issues troubling the Euro-area. It is difficult to say just how long the peace lasts this time – previous efforts have shown diminishing hold. Yet, we have spent the big-ticket items and risk influence is fading fast. In the meantime, watch the docket for the periphery (Irish 3Q GDP, Spanish housing, Portuguese trade) and watch 10-year government bond yields.

Japanese Yen: ‘Buy the Rumor, Sell the News’ with Election?There is no mistaking that the Japanese yen was the weakest currency this past week. In the past five weeks, the currency has dropped between 5 (against the dollar) and 8.8 (versus the euro) percent. This is a rapid move that is partially due to risk trends but clearly amplified by the expectation that stimulus will be ramped up if power changes hands. The election is this weekend, and the most recent polls show the opposition LDP taking command and perhaps even winning a two-thirds majority in the lower house of Parliament. That would be significant as it can override veto and push through reform for the gridlocked country. Yet, should we expect a big stimulus push? Expectations are very high.

New Zealand Dollar Most Overbought Currency of the Majors

The euro technically has gained against the New Zealand dollar, but for persistence and momentum, the kiwi has dominated. Where has this strength come from? Risk appetite has climbed thanks in part to the introduction of new stimulus measures and the stabilization of immediate financial threats. Yet, this shouldn’t confer leveraged strength for the New Zealand currency. The 10-year kiwi rate has lost ground to the Aussie’s and there isn’t a ‘reserve’ title in the winds. Perhaps the drive is on the improvement in the yield outlook. Where the market was confident of a 25bp cut over the next year at the beginning of the year, the forecast is neutral now. Yet, that catalyst is now spent.

Swiss Franc: Risk Aversion, Spanish Capital Flow Weighing on EURCHF

Around the introduction of the ECB’s OMT program, EURCHF started to climb off of the SNB’s enforced 1.2000-floor. Since then, we have seen a few drivers to add to the vague ‘reduction in Euro-area tail risk’, but each has failed to push the pair towards 1.2200. Vows of holding the floor in place, the government opening up the books to foreign tax authorities and Swiss banks charging for franc accounts doesn’t seem to offer a permanent lift. As long as funds keep fleeing the Euro-area, the franc will remain buoyant. And there is still reason to move funds out of the EU…

Australian Dollar Watches Risk as COT Speculative Long Interest Hits Record

Looking at the FX market, we saw risk appetite lifting the markets, but we really didn’t see that same persistence in the other asset classes. Most notably, the S&P 500 ended off this past week with a second consecutive daily drop with volume showing a clear pattern of winding down. Risk may be exhausted and prone to a natural correction – which doesn’t bode well with COT figures reflecting a record in long Aussie interest.

If we were simply looking at the chart, it would seem that gold had a pretty lackluster week. The metal was little changed on the week, but it was nevertheless the third weekly decline and a close below 1700. Furthermore, volume was at its lowest level since early August. All of this during a serious increase in stimulus from the Fed. Gold may need to see a deeper distrust in fiat assets to take 1800.

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